Blind Spot Covered Ex-Trader's Trail

Morgan Stanley plans to claw back some of the pay it owes a trader who pleaded guilty last week to a federal wire fraud charge for misleading his former employer, Goldman Sachs Group Inc., according to people familiar with the case.

Goldman had fired the trader, Matthew Taylor, in December 2007 for hiding an $8.3 billion futures bet from his former bosses. Morgan Stanley, which hired him only a few months later, now aims to withhold $100,000 to $200,000 in deferred compensation on grounds he misrepresented the circumstances of his exit from Goldman, the people said.

The move highlights one of the tougher hiring tasks on Wall Street: unearthing alleged past misdeeds or missteps of potential employees—who often put millions of dollars of a firm's own money at risk. And as Mr. Taylor's case shows, warning signs can be overtaken by a firm's desire to hire a potential money-maker.

Mr. Taylor previously worked at Morgan Stanley from 2001 to 2005, and the firm hired him back in March 2008 partly because it didn't think his conduct at Goldman was a serious regulatory matter, according to the people familiar with the firm. In records made public by the Financial Industry Regulatory Authority, Goldman said Mr. Taylor's departure was due to "alleged conduct related to inappropriately large proprietary futures positions in a firm trading account."

Thomas Rotko, Mr. Taylor's lawyer, said that "Morgan Stanley decided, based upon their own investigation and their prior knowledge of Matt Taylor, to rehire him—fully cognizant that Goldman reported that he was discharged due to conduct related to inappropriately large futures positions in a firm trading account."

ENLARGE

Brokerages are required to submit so-called U-5 forms with Finra whenever an employee leaves and terminates the securities licenses issued through that firm. But some industry observers said the filings often don't provide a clear window into the employee's past.

"The wording on the document could be the same for someone who hardly did anything wrong or something more serious," said Jeanne Branthover, head of the global financial-services practice at Boyden, an executive-search firm.

A Goldman spokeswoman said, "Upon discovering Taylor's unauthorized conduct, Goldman Sachs took immediate action and terminated his employment." She added: "We promptly reported the incident to Finra and filed a U-5 that explicitly stated that Mr. Taylor was terminated for conduct related to 'inappropriately large proprietary futures positions in a firm trading account.'"

People close to Morgan Stanley argue that the characterizations of Mr. Taylor's actions could have described various scenarios, including an honest dispute about the size of a trade.

Morgan Stanley executives, while aware of the Finra disclosures about Mr. Taylor's departure from Goldman, weren't aware that he had been accused of concealing billions of dollars in positions and misleading his employer, people familiar with the firm said.

In Mr. Taylor's complete U-5 form, made available by Finra to member firms to help inform their hiring decisions, Goldman checked "yes" to a question on whether the former trader had been discharged amid allegations of "violating investment-related statutes, regulations, rules or industry standards of conduct," according to a person familiar with the document. But when asked if Mr. Taylor had faced allegations of "fraud or the wrongful taking of property," Goldman marked "no," the person said.

"Morgan Stanley must have been either very interested in hiring this guy or very fooled by the disclosure," said Jeffrey Liddle, founding partner of Liddle & Robinson LLP, which has represented Wall Street officials in employment disputes. "In our own experience, they usually err in the conservative direction on this kind of thing."

Mr. Taylor worked at Morgan Stanley for another four years after his re-hiring, before leaving the firm in August 2012, according to regulatory records.

Overall, between $100,000 and $200,000 in deferred compensation for Mr. Taylor is at stake in Morgan Stanley's clawback, according to the people familiar with the situation. In 2007, while he was at Goldman, Mr. Taylor believed he was in line for a bonus of about $1.6 million in addition to a $150,000 salary, court records show.

Goldman never paid a 2007 bonus to Mr. Taylor, who was fired within weeks of the end of the bank's fiscal year.

Morgan Stanley and other securities firms have deferred bigger chunks of employee pay in recent years to reduce traders' incentive to take on risky bets that might blow a hole in the firm's finances later. Deferred pay can run into the millions of dollars.

Mr. Taylor was sued by the Commodity Futures Trading Commission in November. He admitted to federal prosecutors that he concealed the trades, which cost Goldman $118.4 million to unwind. Mr. Taylor told a federal judge he made the big bets to boost his bonus and reputation at the bank.

Last week, he admitted to one criminal count of wire fraud and will be sentenced later this year. Prosecutors have recommended a range of two years and nine months to three years in prison.

In December, Goldman agreed to pay $1.5 million to settle civil charges that it failed to supervise Mr. Taylor. The CFTC said in its settlement that Goldman wasn't fully forthcoming with regulators when Mr. Taylor was fired.

The bank, which didn't admit or deny wrongdoing, cooperated in the probe, according to a person familiar with the investigation. "We are very disappointed by Mr. Taylor's unauthorized conduct and betrayal of the firm's trust in him," a Goldman spokeswoman said Wednesday.

Firms are reluctant to add many details into the reasons they fired an employee, especially if those actions spurred legal or regulatory processes that have yet to run their course. And lacking a full account of those reasons, would-be employers must gauge whether the red flag is serious enough to outweigh the reasons that made the person a potential hire in the first place.

"It's always a balancing act," said one brokerage firm official.

But in some states, including New York, firms enjoy stronger protections against defamation claims from former employees, said Ethan Brecher, an lawyer who has represented individuals in claims against their former employees.

A U-5 form "can have a really damaging effect if the firm says something that's not true, or not thoroughly investigated," said Mr. Brecher.

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